Special Report
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Ohio Teachers:
State Teachers Retirement System Proposes Changes to Pension Plan— Nothing Has Changed Yet
What's happened?
On September 1, the STRS Board announced its proposal for changes to STRS funding and benefits. This means that we finally know some specifics about changes that may be coming to the State Teachers Retirement System of Ohio. (Similar information is expected from the other four public employee pension systems in Ohio.)
Nothing is final yet—the proposed changes will require a change to state law, so you’ll have a chance to make your voice heard with your state legislators.
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We expect these further steps before there are any changes in STRS pensions:
- The Board will formally present its proposal to the Ohio Retirement Study Council (ORSC) on September 9.
- STRS and ORSC would collaborate on the drafting of a bill to be introduced in the Ohio General Assembly.
- The Ohio House and Ohio Senate would consider, possibly revise, and vote on a bill to change the pension rules.
- The Governor would have to sign the bill, or it would have to become law without his signature.
Should anything about these proposals prompt you to withdraw your STRS account if you're able to, and invest it yourself? Probably not. Withdrawing your account is usually a pretty bad idea. In any case, the proposed changes are far from being a done deal. If you have opinions to share with decision-makers, there’s still time.
What did the STRS Board propose?
Note: These are my preliminary assessments of the information released in the September 1, 2009 STRS Board announcement. I have confirmed them by telephone with an STRS representative on September 2, 2009. For definitive information, call STRS at 888-227-7877.
With that said, here’s the short form: There is bad news for just about everyone with a stake in STRS. It does seem like the Board has tried to spread the pain around, and that they’re asking the least of people who have the least time to plan for changes.
I’ve listed changes sorted by the parties directly affected.
Retired Teachers
Your pension won’t change much, but there would be a reduction in checks you may have been expecting in the future.
COLAs would decrease
If you’re already retired under STRS, your annual cost-of-living adjustment (COLA) would be reduced. You’d keep all the COLAs you’ve received up to now, and through June 2011. Beginning July 2011, further COLAs will drop from 3% of your first year’s pension to 2%. Those retiring July 2011 or after will get COLAs of 1.5% of their first year’s pension.
Comment:
- The glass is half-empty: it would be an actual reduction in benefits you may have been expecting.
- The glass is half-full. STRS wouldn’t recalculate COLAs applied prior to July 2011—you’d keep those. Future COLAs, on top of those earlier 3% COLAs, would be smaller, at 2%.
- Many private-sector pensions provide no COLA whatsoever, so this is still better than nothing. As bitter pills go, it could have been much worse.
- If this is the worst that’s being imposed on retired teachers, it may not be any fun, but it’s OK to breathe a sigh of relief.
Teachers Still Working
You would see the greatest number of different changes to your pension.
COLAs would decrease
See the section above describing changes to the COLA for retired teachers.
Teacher Contributions Would Increase
The percent of a teacher’s pay contributed to STRS would increase beginning July 1, 2011.
Current Teacher Contribution Level: 10.0%.
Beginning July 1, 2011: 10.5%
Beginning July 1, 2012: 11.0%
Beginning July 1, 2013: 11.5%
Beginning July 1, 2014: 12.0%
Beginning July 1, 2015: 12.5%
Final Average Salary (FAS) Would Likely Be Reduced
The traditional retirement plan bases the amount of the pension in part on the employee’s FAS. Presently, this is figured by averaging the member’s three school years of highest earnings. The higher the FAS, the higher the monthly pension in retirement.
Under the proposal, beginning August 2015, new retirees would have their FAS calculated by averaging the five years of highest earnings. Since this includes two additional years that weren’t included before (and probably are years in which the teacher didn't earn as much), this would likely pull the average down, reducing the FAS (and therefore the monthly pension amount) for most benefit recipients retiring August 2015 or later.
Work Longer Before Retiring
Also beginning August 2015, some teachers would have to work longer before receiving their pensions.
STRS participants are currently eligible to retire—
—at any age with 30 years of service.
—at age 55 with 25 years of service.
—at age 60 with 5 years of service.
Beginning August 2015, teachers could retire—
—at any age with 35 years of service
—at age 60 with 30 years of service
—at age 65 with 5 years of service
Comment: Delaying eligibility for benefits for five years means STRS effectively has five extra years to fund future benefits. It also means some teachers need to find a way to pay the bills for five more years before they'd receive their pensions.
You would be able to retire earlier with a reduced benefit—
—at age 55 with 30 years
—at age 60 with 5 years
And if you meet age and service eligibility for service retirement under existing rules as of July 1, 2015, you would still be eligible to retire.
Comment: It is not clear from the Board’s announcement whether you would still be subject to the actuarial reduction. It wouldn’t seem to make sense to talk about an actuarial reduction for everyone, and then say teachers eligible to retire on July 1, 2015 would be subject to the same rule. But until this is clarified, don’t assume you could retire under the old rules without actuarial reduction.
Change in Benefit Formula for More than 30 Years of Service
The retirement formula has a few complications in it. For the first 30 years of service, the benefit recipient is eligible for 2.2% of FAS for each year worked. For additional years of contributing service credit (not purchased or other non-contributing credit), the benefit increases. For instance for the 31st year, the recipient will get 2.5% of FAS. For the 32nd it’s 2.6%. For the 35th year it’s 2.9%.
The new calculation would leave unchanged the 2.2% per year for the first 30 years of service. But for retirements beginning August 2015, for every year of contributing service above 30, the benefit recipient would be eligible for 2.5% per year.
Comment: This is the formula that has been in place for some years under Ohio’s Public Employees Retirement System.
If, as of July 1, 2015, you have
—30 years of service, or
—are age 55 with 25 years of service, or
—are age 60 with 5 years of service,
you would be eligible to receive the greater of
—the benefit as of July 1, 2015 under the current formula; or
—the benefit at retirement under the new formula.
Comment: The announcement notes that “members who are eligible for service retirement will receive no less of a base pension benefit than they could have received on July 1, 2015. Under the new formula, at the end of a 35-year career, teachers would receive 78.5% of their FAS; teachers who retire at age 60 with 38 years would receive 86% of FAS.”
Note that this does not say that when you retire, you can pick the formula as of that time. When you retire you would get the greater of the then-current benefit, or the benefit you would have received if you’d retired July 1, 2015.
Employers
Employers have some additional time to adjust their budgets to the increased demands that the STRS will place on their finances.
Employer Contributions Would Increase
The percent of a teacher’s pay that the employer’s would contribute to STRS would increase beginning July 1, 2016.
Current Employer Contribution Level: 14.0%.
Beginning July 1, 2016: 14.5%
Beginning July 1, 2017: 15.0%
Beginning July 1, 2018: 15.5%
Beginning July 1, 2019: 16.0%
Beginning July 1, 2020: 16.5%
Comment: As before, the teacher’s contribution from their own paycheck would remain less than the employer’s. And as before, the more money the employer is required to contribute to STRS, the less they have available to offer to teachers as salary, or to upgrade facilities, or to provide adequate supplies in the classroom, or to meet all the other financial obligations of a public school system.
What next?
Check here for links to updates on this report. You can also likely find updated details as they’re available at the STRS website: http://www.strsoh.org. You can call STRS at 888-227-7877.
You can also read the September 1, 2009 announcement.
This is, and will likely remain, a hot news story. Keep a close eye on reliable, non-sensationalist news sources.
And beware of financial scoundrels who want to get rich by preying on your fears. It’s very difficult to have a more secure retirement through your own investment of your STRS funds—be very wary of anyone who says you should withdraw your account and invest it yourself instead of taking an STRS pension.
—Kenneth F. Robinson, JD, CFP®
STRS participants with questions may call Ken Robinson at 216-688-3737.
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